Hedge Fund Launches Fall While Liquidations Plunge to Historic Low in 3Q21

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According to Hedge Fund Research, 132 new hedge funds were estimated to have launched in the 3rd Qtr 2021 – a 27% drop from the prior quarter.  However the number of liquidations plunged during the quarter to a historic low, enabling net hedge fund growth to rise for the fifth consecutive quarter.

3rd Qtr 2021 Hedge Fund Launches & Liquidations

Chicago based Hedge Fund Research recently reported that an estimated 132 hedge funds were launched in the 3rd Qtr 2021, compared to the 180 funds that were launched in the 2nd Qtr 2021.  Launches over the trailing four quarters totaled 676 new funds, a total which tops calendar year totals for the past three years dating back to 2017 when 735 funds were launched.

Hedge fund liquidations during the 3rd Qtr 2021 dropped sharply to a historic low of 102 funds from 149 closures in the 2nd Qtr of 2021.  The level of liquidations in the 3rd Qtr was the lowest total since the 2nd Qtr 2006.  On a net basis, 30 hedge funds opened in the 3rd Qtr 2021, marking the fifth consecutive quarter where fund launches exceeded liquidations.

HFR President Kenneth Heinz explained the drivers for recent hedge fund performance saying, “Rising macroeconomic uncertainty continues to dominate hedge fund industry trends, driving institutional investors positioning for this uncertainty and looking for portfolio capital protections to maintain or increase allocations to existing managers, resulting in a historic low in fund liquidations. The forward uncertainty is driven by concerns regarding rising inflation, government spending, higher US interest rates and continued spread of the Omicron variant.”

New hedge fund launch trends combined with robust fund performance are expected to continue into 2022 enabling the industry to continue to set new AUM records.  Industry capital eclipsed a record $4.04 trillion in October 2021.

Our Take

The continued growth in the number of net new hedge funds launched, the strong performance seen this year from most hedge fund strategies, and the record amount of total industry capital seen in the 3rd Qtr of 2021 indicates that the hedge fund industry is recovering nicely following the struggles associated with the 2020 COVID-19 pandemic.

The pickup in hedge fund launches and the positive performance seen for most hedge funds during 2021 should be a boon for the institutional research marketplace as hedge funds are traditionally the most aggressive users of sell-side and independent research and the most lucrative clients for these providers.  Consequently, we suspect that hedge funds are likely to reward their best sell-side and independent research firms through higher research payments in the coming quarters. 

This does not mean that all asset managers will raise their payments to their external research providers, as many long only managers have been reticent to boost their research payments.  This conflicting pattern suggests that most sell-side and independent research firms are likely to continue focusing their efforts on serving hedge fund clients versus their long only customers as these funds remain their most profitable clients.

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Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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